Beating economic headwinds — is your growth strategy ready?
Three nimble CFOs chart strategies to thrive in any market.
The only constant is change.
Ever-changing, and sometimes contradictory, economic indicators and financial data can give CFOs plenty to puzzle over. Markets are down and interest rates up, but how long will this challenging macroeconomic environment last? What kind of planning is possible when the labor market remains stubbornly tight in the tech industry?
Across industries, many CFOs remain focused on the long-term opportunity while keeping a sharp eye on risk factors. We spoke with three CFOs about how they are managing through uncharted waters and are striving to run efficient operations while keeping their companies on a growth path.
$43 million (private equity)
Scenario planning to keep growth on track.
One of the lessons that John McDonnell, CFO of Evive, learned during earlier downturns is that with good planning, companies can often maintain growth and come out stronger once the economy rebounds.
“Most of the time, when you run into one of these cycles, you underestimate the revenue impact that you might experience, and you overestimate your ability to respond to it on the cost side,” McDonnell says. “As a finance leader, you have to force your teams to run through a couple of scenarios.”
At Evive, a platform that simplifies and personalizes company benefits to boost employee engagement, McDonnell has made scenario planning into a centerpiece of its strategy, allowing the company to build up a two-year runway, identify opportunities for investment, and shift resources to areas that can stimulate growth.
One thing McDonnell can’t fully control: customers. While Evive prides itself on strong relationships, he knows that even happy customers may resort to cancellations if forced to cut their own costs in a downturn. Scenario planning and an increased emphasis on financial discipline has helped McDonnell to be prepared should customer churn run higher and revenue lower than planned.
McDonnell also looked at available benchmarks of Evive’s peers to see if the company had overinvested in any areas during the bull market. “Those should be the areas where you begin to taper back,” he says. “You can start with hiring freezes to avoid a staff reduction.”
Along with these measures, McDonnell has placed a stronger focus on things like monthly reviews of financial accounting and reconciliation of records. That extra vigilance can ensure that the company is tracking according to plan and avoid miscommunications that can arise with a distributed workforce.
Given the uncertainty that endures around the economy, Evive is starting another round of strategic planning for 2023, this time building a plan with a base case, a high case, and a low case. As revenue goals are met, the company will free up more investments in future growth. “Sitting on some costs may slow down your innovation, but you can always accelerate the product roadmap,” McDonnell says.
TL;DR — By modeling potential scenarios, Evive keeps a close eye on performance, freeing up investment as goals are met.
“As a finance leader, you have to force your teams to run through a couple of scenarios.”
— John McDonnell, CFO of Evive
SaaS platform and tech-enabled platform trading for financial institutions
Empowering employees to embrace financial discipline.
At Derivative Path, financial discipline is part of the company’s DNA, as its CFO helped to establish a culture of making a business case for every spend. “We task all employees regardless of function with justifying spend through return on investment,” says Kurt Boehringer, CFO of the fintech company, whose cloud-based platform provides financial institutions greater control of their interest rate, commodities, and foreign exchange derivatives, and facilitates international payments.
“Whether it’s hiring a new salesperson or spending money on R&D, we want them to think as if they’re investing that dollar and then pitch to us what that dollar spent will do relative to the other dollars spent,” he says.
That discipline has come in handy as Derivative Path contends with a potential downturn. Through extensive training on the company’s financials, Boehringer has pushed management to understand how their budget decisions impact the entire business. That requires his team to be transparent about financial performance and goals and to treat management as partners in achieving those goals. Incentives play a role too, since compensation at Derivative Path is tied to company performance.
“By providing employees with parameters, we empower and entrust them to assess whether spending is warranted,” says Boehringer. Those who are closest to customers are often the first to spot opportunities for smart spending decisions.
Boehringer has also put in place a budgeting system that authorizes additional funds to be allocated when an investment hits certain milestones. This allows him to allocate dollars more efficiently. For example, to prepare for 2023, Boehringer has started looking at a range of budget scenarios based on revenue performance that drive individual spending decisions. “We want people to own their budget. When we reach a certain milestone, they can add another vendor or hire another two people,” Boehringer says. “That allows us to be quicker in our decision-making throughout the year. We can react more quickly without a drawn-out process.”
Derivative Path is also responding to economic uncertainty by working to make revenue more predictable by favoring fixed over variable revenue. “If you know you’ll be working with us for three years at a certain capacity, we’ll give you a percentage discount,” Boehringer says. “That locks in consistent revenue for the next three years. And ideally, it’s prepaid. So it helps with any cash flow concerns.”
TL;DR — Derivative Path is prioritizing predictable, recurring revenue models and empowering employees to own their budgets.
“By providing employees with parameters, we empower and entrust them to assess whether spending is warranted.”
— Kurt Boehringer, CFO of Derivative Path
Corporate cards and spend management software
Stack-ranking priorities dynamically with an eye on ROI and customer success.
At Brex, CFO and COO Michael Tannenbaum watched as the low cost of capital created bad habits across many growth companies in recent years. “Before, with infinite resources, there was more of a mindset of set it and forget it, we’re going to invest in this, we’re going to invest in that and just let those businesses run,” he says. Today’s environment calls for “a more focused perspective on what is an appropriate ROI,” he says. “Markets move up and move down. We have to think about what ROI means for us across varying economic environments.”
Together with the leadership team, Tannenbaum worked to establish criteria for what was most important to the company: Investments and budget allocations would need to align with the company’s mission and contribute to customer success.
When several projects score highly on those factors, the team ranks them by priority and allocates costs accordingly, giving a top project a larger portion of the budget. The list gets revisited at least every six-month planning cycle, with quarterly adjustments, and budget and resources are shifted as needed.
“We’re optimizing where we spend our resources,” Tannenbaum says. “And that’s really the biggest thing you can do in a world of scarcity.”
This dynamic approach to planning allows the company to be nimble and react quickly at a time when it’s harder than ever to predict what’s coming. “Most data models don’t even have data as far back as the last recession,” Tannenbaum says. “So I can’t just go look at a data model and expect it to tell me what to do. You have to have real judgment and think expansively around what you’re doing.” But keeping a focus on the customer, he says, is the best way to ensure that financial success will follow.
Given that the economic outlook remains uncertain, Tannenbaum is also keeping a CFO’s eye on risk factors that could affect the company. If customers have to pull back, or a banking partner changes course, Brex has to be ready, and Tannenbaum has worked with fellow leadership team members to develop strong contingency plans.
“And we need to have a contingency for the contingency,” he says. That’s why planning always includes worst-case scenarios. “If we don’t deliver for customers because something happens with our service, we lose that trust forever.”
TL;DR — Brex reevaluated its goals and priorities and set spending plans against them, with built-in flexibility to react to a changing market.
“We need to have a contingency for the contingency.”
— Michael Tannenbaum, CFO and COO of Brex
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